Research and Developement Tax Credit
Posted by Angela Clarke | Filed under Accounting, Auditing, Budget, Grants, Latest News, Payroll, Research and Development, Start ups, Tax
RESEARCH AND DEVELOPMENT TAX CREDIT
R&D Tax Credit Summary
- A 25% tax credit can be claimed against qualifying R&D expenditure by Irish tax-resident companies within the European Economic Area (EEA).
- Flexibility in the R&D tax credit system grants companies whose corporation tax liability is insufficient to claim the credit via a refund by the revenue commissioners over three accounting periods.
- The R&D tax credit is claimable against “qualifying buildings” which are defined as buildings with a minimum R&D usage of 35% over a defined 4 years period
- R&D work sub-contracted to unconnected parties also qualifies for the credit, up to a maximum of 10% of the company’s qualifying R&D expenditure in any one year
- Up to 5% of R&D expenditure can be outsourced to European universities
- You effectively get relief of up to 37.5 per cent of the cost of R&D
What can be classed as R&D?
- Developing a new product/improving an existing product.
- Developing a new process/improving and existing process system.
- Improvements to plant performance/improving energy efficiency
- Improvements to production (waste reduction, yield improvement, substitution of raw materials.)
- Development of product specifications with customers or suppliers
- Use of universities or external experts to assist developments in your business
Research and Development Expenditure. S 766 TCA 1997
The principal features of relief under Section 766 TCA 1997 are as follows:
- The tax credit is available to all companies, within the charge to Irish tax, who undertake research and development activities within the European Economic Area (EEA).
- The tax credit is available on incremental R&D expenditure. The Finance (No 2) Act 2008 set 2003 as the base year for all accounting periods.
- For expenditure incurred in accounting periods commencing on or after 1/1/2009 the relief is calculated as 25% of qualifying expenditure. The credit is then used to first reduce the liability to Corporation Tax for that accounting period.
- Where a company has insufficient corporation tax against which to claim the R&D tax credit in a given accounting period, the tax credit may be carried forward indefinitely
- The tax credit is in addition to any allowable deductions for R&D expenditure in the accounts of the company
- Companies claiming the R&D tax credit are not required to hold the intellectual property rights resulting from the R&D work.
- Any expenditure which is met directly or indirectly by any grant from the state will not qualify for relief.
Use of Unused Credits;
- In respect of expenditure incurred in accounting periods commencing on or after 1 January 2009 the company may first offset that unused portion of the credit against the corporation tax of the preceding accounting period .
- Where a company has offset the credit against the corporation tax of the preceding accounting period or where no corporation tax arises for that period, and an excess still remains, the company may make a claim to have the amount of that excess paid to them by the Revenue Commissioners in 3 instalments.
- The 3 instalments will be paid over a period of 33 months from the end of the accounting period in which the expenditure was incurred. The first instalment to be paid will amount to 33 per cent of the excess
- The remaining balance will then be used to first reduce the corporation tax of the next accounting period and if any excess still remains, a second instalment amounting to 50 per cent of that excess will be paid to the company.
- Any further excess will then be used to reduce the corporation tax of the following accounting period and if an excess still remains, that amount will be paid to the company as the third installment
There is a limit on the amount of tax credits payable to a company by Revenue. The limit refers to amounts payable under both S766 and S766A. The amount cannot exceed the greater of;
- The corporation tax payable by the company for the 10 years prior to the accounting period preceding the period in which the expenditure was incurred, or The amount of PAYE, PRSI and levies, which the company is required to remit in the period in which the expenditure was incurred
In the absence of such a claim for payment, the excess will be carried forward for offset against corporation tax in the subsequent accounting period.
Expenditure on Buildings or Structures used for R&D activities
- Section 766A TCA 1997 deals with the tax credit for expenditure on buildings or structures used for research and development. To qualify the company must be entitled to claim industrial buildings capital allowances on the building/structure.
- The incremental basis does not apply for expenditure on buildings. There is no base year for Section 766A.
- The relief is calculated as 25% of the qualifying expenditure. The credit is then used to reduce the liability to Corporation Tax for the accounting period in which the expenditure was incurred.
- Where a company has insufficient corporation tax to claim the tax credit in that accounting period, the tax credit may be carried forward indefinitely. Changes introduced in the Finance (No.2) Act 2008 allow a company, on receipt of a claim, to use any excess credit as set out above.
- The tax credit is in addition to Capital Allowances.
- Where a building or structure to be used for R&D is part of a building or structure, or is one of a number of buildings in a single development, such apportionments as is necessary should be used to determine the expenditure on R&D.
- Also the credit will now be available in respect of new expenditure on the construction, including refurbishment, of a building or structure, where the research and development activities carried on by a company in that building or structure over a period of 4 years (referred to as the “specified relevant period”) represents at least 35 per cent of all activities carried on in the building or structure. The credit is calculated by reference only to the portion of the building or structure to be used for research and development activities.
- The tax credit is clawed back if, within 10 years of the accounting period for which a credit is claimed, the building or structure is sold or commences to be used for purposes other than the carrying on by the company of R&D activities
Subcontracting Research and Development Activities Out.
There are two situations where the law provides for relief for a company that has not carried out the research and development itself:
- A company, which incurs expenditure on research and development, and pays a sum to a university or institute to carry out such activities in a relevant Member State, can claim relief. Relief will be restricted to 5% of the expenditure incurred by the company itself on research and development activities
- A company, which incurs expenditure on research and development, and pays a sum to another person other than above who is not a connected person, in order for that person to carry on research and development activities, can claim relief. Relief will be restricted to 10% of the expenditure incurred by the company itself on research and development activities. Relief will only be granted where
The subcontracted person does not claim this relief.
Research and Development Activities
Essentially only expenditure on Research and Development activities may qualify for the tax credit. Qualifying activities must satisfy all of the following conditions. They must be:
1. Systematic, investigative or experimental activities
2. in a field of science or technology
3. One or more of the following categories of research and development:
- Basic research,
- Applied research, or
- Experimental development.
4. Seeking to achieve scientific or technological advancement and involve the resolution of scientific or technological uncertainty
Qualifying Expenditure
The tax credit will be available in respect of expenditure incurred in the carrying on of research and development activities under the usual tax rules relating to such expenditure. Under these rules expenses such as staff and overhead costs can be apportioned and the
credit will be available for the portion expended in the carrying on of the research and development activity.
Allowable expenditure would include the cost of the following activities:
- Engineering, design, operational research, mathematical analysis, computer programming, data collection, testing, or psychological research;
- Indirect supporting activities such as maintenance, security, administration and clerical activities, finance and personnel activities;
- ancillary activities essential to the undertaking of research and development activities such as taking on and paying staff, leasing laboratories and maintaining research and development equipment including computers used for research and development activities;
- The cost of plant and machinery used wholly and exclusively for R&D activity.
- Expenditure on research and development will qualify for the tax credit even though it may be brought into account for accounting purposes in determining the value of an asset.
- Interest will not be taken into account as expenditure on research and development for the purposes of the tax credit even though, for accounting purposes, it may be included in the value of an asset.
- Expenditure on research and developments shall not include a royalty or other sum paid by a company in respect of the user of an invention: If it is paid to a person connected with the company and the royalty is exempt from tax in the hands of the recipient, or The payment is not an arm’s length fee Royalty payments not subject to the above exclusion would qualify provided they are incurred in the carrying on of research and development activities as defined in the law.
Information to be retained by the Company in support of claims
To avail of the R&D tax credit the company must be in a position to demonstrate that its claim can satisfy two essential tests.
The Science Test - That the activities under review are consistent with the statutory definition of research and development activities.
The Accounting Test -That the expenditure claimed as being laid out on qualifying research and development activities are correctly so claimed.
Records Required To Be Maintained To Satisfy The Science Test
- A description of the research and development activities, the methods to be used and what the company seeks to achieve by the undertaking the activities concerned
- The field of science and technology concerned
- The scientific or technological advancement that is the goal of the research and development activities, and
- The scientific and technological uncertainty the company is seeking to resolve by those activities,
- Details of systematic investigation,
-the hypothesis advanced
-the series of experiments or investigations undertaken to test the hypothesis
-documentary evidence of the necessity for each major element and how it fits into the project as a whole
-dated documents of the original scientific or technological goals, the progress of the work, how it was carried out and the conclusions
-indicators or measures identified at the commencement of the project to determine if the scientific or technological objectives of the research and development activities are met
- The qualifications, skill and experience of the project manager
- The numbers, qualifications and skill levels of other personnel working on the project
Given the high cost of research and development activities and the requirement for ongoing monitoring inherent in such projects, the records required for Revenue purposes should generally be available within a company for its own internal purposes. The company will, in any event, need to document the project and the information required may be contained in:
- Status and/or progress reports
- Notebooks, lab reports, patents, and patent applications
- Notes of problems encountered in the course of the project that identified areas of technological uncertainty and experimental development
- Feasibility plan and/or outline methodology adopted
- Files on personnel involved in the project
Records Required To Be Maintained To Satisfy The Accounting Test
Sections 886 and 903 of TCA 1997, Section 16 VAT Act 1972 and VAT Regulations 1979 all impose obligations on a taxpayer to keep certain books and records. The maintenance of these records is required to enable a taxpayer to make true tax returns and in the event of Revenue audit to demonstrate that the credit claimed is correct.
Claiming the Credit.
Where a company is satisfied that it can comply with the requirements, a claim to relief may be made by completing Section 9 (headed Research And Development Tax Credit) of the form CT1. It is important to note that no supporting documentation is required to be submitted with the return. In this respect, claiming a research and development tax credit is no different from claiming any other corporation tax relief or tax credit. From 1/1/2009 all claims for research and development tax credit must be made within 12 months from the end of the accounting period in which the expenditure was incurred.
Consultation with other persons (Experts)
To ensure compliance with legislation, Revenue may examine the entitlement of certain claims to tax credit for R&D activities. For this Revenue normally require the assistance of qualified individuals with specialised knowledge in the relevant field of science or technology. That individual acts on a consultancy basis for Revenue. They report to Revenue as to whether, in their opinion, the activities examined constitute R&D activities, as defined. Where the opinion of such expert is disputed by a claimant company, the expert may be required to give evidence before the Appeal Commissioners or a court of law.
Before disclosing information to that person, Revenue will notify the company of:
- The identity of that person, and
- The information they intend to disclose.
- Obtain a signed confidentiality agreement from the expert.
The claimant company may object to the use of that particular expert where they can demonstrate a genuine conflict of interests. In any case of dispute the claimant company will have the right of appeal to The Appeal Commissioners, against the use of a particular
RTI Grants
As, in broad terms, the definition of R & D contained in S 766 TCA 1997 and used by Enterprise Ireland Research Technology & Innovation (RTI) Grants Scheme are similar, it has been decided that Revenue will not, as a rule, seek to have a claim in respect of smaller projects examined by an expert where an Enterprise Ireland RTI Grant has been approved in respect of the project. This practice will apply where.
- The project has received an RTI grant, and
- The R & D tax credit claimed for an accounting period (of not less than 12 months) is €50,000 or less, and
- The project is undertaken in a prescribed field of science or technology, as defined in regulations (S.I. No 434 of 2004).
This practice applies only to RTI Grants administered by Enterprise Ireland and not any other grant, whether they are for R & D or otherwise.
Advance Opinion
The Revenue Commissioners would be prepared to give an advance opinion as to whether a proposed project would satisfy the requirements of the legislation. When such requests are received Revenue normally engages an expert. It is envisaged that such opinions will only be given in respect of projects that have commenced within the last 12 months.
Applications for an advance opinion containing the information as outlined in paragraph 10 should be made to:
Isolde Hampson
Corporate Business & International Division,
Stamping Building,
Dublin Castle,
Dublin 2. Phone 01 6748103
mailto:ihampson@revenue.ie
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Tags: Expenditure on Buildings or Structures used for R&D activities, investigative or experimental activities, qualifying buildings, qualifying R&D expenditure, R&D, R&D Tax Credit, R&D work sub-contracted, Research and Development, RTI Grants, Section 766A TCA 1997, Systematic
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